What is a Ghost Policy?
A ghost policy is a type of insurance policy used by businesses or professionals who don’t currently have any employees or payroll AND the owner has excluded themself, but they still need to maintain coverage.
You might ask “Well, who does a Ghost Policy cover then?”. The simple answer is no one, but it does still have a purpose. Typically, this policy is used to meet legal or contractual obligations while keeping costs low.
Key Characteristics of a Ghost Policy:
No Active Coverage for Employees
A ghost policy provides the minimum necessary coverage without actually covering active employees. This means there are no employees actively covered under the policy, but it still satisfies legal or contractual obligations for having insurance in place.Cost-Effective
Since there are no employees or operations under the policy, the premiums are typically much lower than a full, active policy that covers actual workers or business operations.Common in Workers’ Compensation
The most common use of a ghost policy is in workers’ compensation insurance. For instance, a business may be required to carry workers’ comp insurance due to legal mandates but does not currently have any employees. The ghost policy fulfills the legal requirement without additional costs.In most states, if an employer has a workers compensation policy, all employees (1099 or W2) are automatically covered on that policy unless they have their own policy. To avoid having to cover and pay for all of those employees, the employer may require the employee to carry their own policy. If that employee doesn’t have any helpers or employees of their own, they would get a workers compensation policy with zero payroll and employees and then exclude themselves to lower the cost, which now makes it a Ghost Policy.
Construction Example
In the construction industry, a general contractor that’s building a house would likely have dozens of subcontractors they use throughout the build. Each of these subcontractors is, according to workers compensation law in most states, considered employees and would fall on the general contractors policy, even if they’re 1099, which could cost tens of thousands of dollars per year. In reality, each of these subcontractors is really its own little business, many of which consist of just one person. This is why the general contractor would require each subcontractor to carry their own policy, which now means they don’t have to be included on the general contractors policy.
Why Use a Ghost Policy?
Legal Compliance
Many states require businesses to maintain certain types of insurance, like workers’ compensation, even if there are no employees. A ghost policy ensures the business remains compliant with insurance regulations.Maintaining Coverage for Future Needs
For businesses that hire employees on a temporary or seasonal basis, a ghost policy can help maintain coverage between periods when no employees are actively working.
How Does a Ghost Policy Work?
A ghost policy is often used when:
A business has no employees at the moment but may in the future.
A business is required to maintain a certain type of insurance (such as workers’ comp) for legal reasons, even if it’s not actively employing people.
The policy provides the basic coverage needed for compliance without incurring the full cost of a comprehensive, active policy.
Conclusion
In short, a ghost policy is a minimal insurance policy that keeps a business compliant with insurance requirements, usually for workers’ compensation or other regulatory needs, without covering active employees. The main benefit is cost savings, as it offers lower premiums compared to a full policy with active coverage.
